- The DXY Index made a recovery towards 102.40 after dipping to close to 102.20.
- December PPIs were lower than expected at 1.8% YoY.
- The US 2-year yield dropped to its lowest point since May 2023.
The US Dollar (USD), as measured by the DXY Index, has been under pressure, dropping to as low as 102.20 due to weak Producer Price Index (PPI) data in December, but has since bounced back to around 102.40. Following these developments, US bond yields are falling, and there are increasing bets on a dovish approach by the Federal Reserve (Fed).
The Fed’s dovish stance, which stems from a willingness to accept reduced inflation and a projection of no rate hikes in 2024, has recently weakened the USD, offsetting the resilience of the US economy against other weakening economic blocks. While the market remains stubborn despite higher CPI numbers, it anticipates the Fed starting its easing cycle sooner rather than later. The soft PPI readings have given the market a reason to expect a less aggressive approach.
Daily digest market movers: US Dollar pressured down by soft PPI and falling US yields
- The US Producer Price Index (PPI) for final demand saw a 1% year-on-year rise in December, slightly lower than the market’s expectation of 1.3% and up from the revised 0.8% increase in November.
- The annual core PPI, which excludes volatile food and energy prices, increased by 1.8% in December, falling below both the November reading and analysts’ estimates of 2% and 1.9%, respectively. The monthly core PPI remained unchanged for the third consecutive month.
- US bond yields are declining. The 2-year yield is currently at 4.13%, its lowest since May 2023, while the 5-year yield rests at 3.83% and the 10-year yield sits at 3.94%.
- The CME FedWatch Tool reveals no rate hike predictions for the January meeting. Instead, March and May 2024 meeting expectations indicate increased probabilities for rate cuts despite Thursday’s hot inflation reading for the CPI.
- The odds of a cut in March rose to 77%, while the odds of another one in May jumped to 70%.
- As tensions rise in the Red Sea between the US and Houthis rebels, the downside is limited for the index.
Technical Analysis: DXY index buyers hold their ground, indicators still in positive territory
The daily Relative Strength Index (RSI), which is currently flat and in positive territory, indicates that buyers have halted their momentum but still maintain control in the short run. Adding to this narrative of tentative bullish strength is the Moving Average Convergence Divergence (MACD). Despite being flat, it’s displaying green bars that suggest buying pressure is maintaining a steady pace.
Meanwhile, when examining the Simple Moving Averages (SMAs) in the short-term, the buyer’s strength is still in play, given that the pair is trading above the 20-day SMA. Nevertheless, trading under both the 100 and 200-day SMAs, a more significant time frame,